How it works (Example):

Let's assume XYZ Bank earns $1,000,000 for the month on its mortgageloans, commercial loans, and personal loans. It also pays $975,000 in interest to its depositors for their CDs, checking accounts, and savings vehicles. Using the formula above, XYZ Bank's net interest income is:

Net Interest Income = $1,000,000 - $975,000 = $25,000

Why it Matters:

In regard to banks, net interest income should go up as the yield curve steepens (long-term rates rise faster than short-term rates) because the bank is able to pay depositors a relatively low rate, but it can charge its borrowers a higher rate.

CONTENT LIBRARY

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